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Facebook Turns In Big Quarter As Mobile Ads Drive Growth

Total Ad Revenue Grew 53% Over the Same Period Last Year

The migration of Facebook's user base to mobile devices has been seen as an existential threat to the social network, but its mobile ad revenue is starting to keep up. It grew to 41% of total ad revenue in the second quarter, sending its shares up more than 17% to $31 after-hours trading.

While Google and Yahoo struggle with mobile, Facebook seems to have figured it out. Mobile has climbed steadily upward as a percentage of Facebook's total ad revenue since the third quarter of last year. It grew from 14% to 23% to 30% and now made the biggest quarter-over-quarter jump to 41%.

Mark Zuckerberg

Considering the global patterns of Facebook usage, demonstrating mobile ad revenue acceleration is critical for the company. There were 819 million mobile monthly active users on Facebook as of June 30, up 51% over the previous year. That's 71% of the total who access the social network at least once a month.

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The bottom line is that although desktop affords much more real estate for ads, including a whole right rail that's missing from the Facebook mobile app and is mainly embraced by direct-response advertisers, fewer and fewer users will be logging in to see it.

CEO Mark Zuckerberg observed that the network now has more daily active users on mobile than on desktop. "Soon we'll have more revenue on mobile than on desktop as well," he said.

Overall, Facebook came out well ahead of Wall Street consensus, posting $1.81 billion in revenue, up 53% from last year's $1.18 billion. Ad revenue was $1.6 billion, or 88% of the total, and up 61% from last year. And net income was $333 million, compared to a net loss of $157 million in the second quarter of 2012, when the company filed for its initial public offering.

Facebook's performance last quarter was largely driven by marketers growing their budgets for news-feed ads, which see higher click-through rates than ads on the right rail, according to chief financial officer David Ebersman. He also observed that news feed ads are expected to be the main driver of Facebook's revenue growth in the second half of the year and that ad prices in the U.S. and Canada increased 40% year over year.

Social-ads company Optimal has accordingly seen a much greater share of the Facebook spend managed by its system dedicated to higher-performing news feed ads in the last six months, according to its CEO Rob Leathern. They're sold at a much higher CPM, or cost per thousand impressions, which benefits the social network's top line.

"News feed has continued to be a larger and larger percentage [of spend]," he said. "Earlier in the year we were at 30%, and we're now well over 60%."

Facebook didn't break out revenue by ad format or shed any light on how its exchange, FBX, is performing. (Chief operating officer Sheryl Sandberg briefly noted that FBX is "a very small part" of the business.) She also observed that revenue from direct-response marketers, including e-commerce companies, had doubled year over year.

Mr. Zuckerberg obliquely addressed the criticism that the Facebook news feed has gotten too commercial. He said that about 5% of news-feed posts seen by users are ads, and there's been no observed drop-off in satisfaction. However, he acknowledged that Facebook will continue watching user reaction closely.

"In recent studies people have told us they've noticed the ads more, so we're going to invest in improving the quality," he said.

Although the social network's global user base continues to grow, there have been reports of Facebook fatigue setting in as social-networking options multiply, particularly among American teenagers. Mr. Zuckerberg confronted those contentions head on, asserting that Facebook has close to fully penetrated the U.S. teen demographic for some time, and that internal data shows there's been no drop-off in monthly or daily use in that group, though it's impossible to measure perfectly since some users lie about their age.

"You could naively assume that more new [social] services mean people spend less time on Facebook," he said. "[But] people are spending more time on Facebook than ever before."

Facebook executives didn't address Facebook Home or the company's long-awaited autoplay video ads, which Ad Age reported were in development last December. The units could contribute materially to revenue if marketers put concerns about disruption to the Facebook user experience aside and adopt them. The asking price was into the seven figures for a day-long "slot," but they're now delayed until the fall.

Ms. Sandberg also hinted that Facebook is hoping to give Twitter a run for its money and not let it corner the market on advertisers looking to do real-time marketing around major events unfolding on TV, like the Super Bowl or the Oscars.

She twice observed that Facebook has a massive audience during primetime hours, on the order of 88 million to 100 million people.